In the final days of the Trump administration, Treasury Secretary Stephen Mnuchin and federal home finance director Mark Calabria signed a new preferred stock purchase agreement that will allow Fannie Mae and Freddie Mac to accumulate $ 275 billion in capital.
The change introduced by Mnuchin and Calabria is intended to stimulate the eventual dismissal of the GSE from the conservatory and to limit its activities, both goals supported by conservatives. The only problem, to quote Jim Parrott of the Urban Institute, is that the PSPA is really bad business for taxpayers.
“As the taxpayer re-raises capital and allows the GSEs to pay even more of their dividends in senior preferred stock, it seems to come out on the short end of the staff. The FHFA and the Treasury Department must write the taxpayer position well below the current position of the GSEs in order to attract new private capital, ”Parrott wrote in a recent Urban Institute article.
The fact that the PSPA can cost taxpayers hundreds of billions of dollars can be more than just a tax issue. In fact, the new deal could have some serious implications for the real estate market and the US economy. Conservative zealots like Director Calabria who oppose a government role in housing may have given President Biden an opportunity to restore full control of the GSEs in the Treasury.
The Biden government has an aggressive housing subsidy agenda, particularly those related to the provision of affordable housing and the use of home ownership to tackle structural economic inequality. Vice President Kamala Harris talks about giving down payments to low-income families as a gift from the taxpayer to buy a home.
Behind the entire discussion about affordable housing, equality of economic outcomes, and "fairness" is the policy of the Federal Open Market Committee. The FOMC's purchase of trillions in mortgage-backed securities since March last year has pushed interest rates to record lows, pushed credit volumes to levels unseen since the mid-2000s, and propelled property prices up on cramped supply of affordable homes.
Fed policy increases house prices and decreases affordability for all Americans. Unfortunately, Washington’s dysfunctional policies dictate more housing subsidies and higher and higher house price inflation, which should affect members of both political parties. President Biden believes that Americans shouldn't spend more than 30% of their income on housing, but he needs to speak to Fed Chairman Powell and the other members of the FOMC.
Notably, a number of observers are predicting a cut in mortgage insurance premium from the federal housing administration as the Biden administration focuses on affordability. This is a deeply bad idea. The secondary market execution for FHA, VA and USDA loans is already very competitive with the conventional loans.
A decrease in MIPS will further increase FHA loan volume while depressing prices for more affordable homes. Instead, President Biden should seek to accelerate housing construction outside of the larger cities, where physical conditions and aging housing stock make social distancing impossible.
According to reports, President Biden plans to ask Congress for $ 40 billion in housing spending this year and $ 640 billion over the course of a decade. To help families buy their first homes and build wealth, the Biden government is aiming for a refundable, deferred tax credit of up to $ 15,000. This is a repackaged version of Harris' proposal to give poor families a down payment to buy a home.
But here's the punch line: if these new policy initiatives aren't adopted by Congress, Washington insiders say the Biden administration could attempt to bankrupt the GSEs. The radical move of reception enables the Biden administration to use the GSEs for political purposes, end private property, and now take the litigation to court. Due to the new PSPA, the restoration of 100% state control makes financial sense as no capital build-up is required in the GSE.
"There's a greater than 50% chance the GSEs will be received and never leave the conservatory," a Washington insider told NMN. “The government will prepare a pre-pack reception, create new businesses with fresh capital and an express guarantee from the Treasury Department, and liquidate Fannie and Freddie. Litigation and other claims, as well as insurance responsibility for the existing conventional MBS, reportedly remain in the bankruptcy administration. "
The assumption, of course, is that there will be no more than a passing impact on the market when Fannie Mae and Freddie Mac are received, but that is a sizable assumption. A more realistic scenario is that the conventional credit market would be disrupted for a few weeks or even months when global investors pulled out of MBS issued by Fannie Mae and Freddie Mac in favor of 100% guaranteed Ginnie Mae securities.
With the White House Biden taking the nuclear option and receiving Fannie Mae and Freddie Mac, you should be prepared for an extended period of disruption in credit markets, including the yet to be announced market for MBS. Conventional MBS are already viewed as worse than Ginnie Mae MBS in the secured finance world, so this change will further hurt investor confidence.
The irony of this incredible situation is that Conservatives wanted to curtail the US government's role in housing construction, but the flawed Mnuchin, Calabria PSPA creates an incentive for the Biden administration to do the opposite. The onerous terms of the new PSPA for taxpayers give progressives the opportunity to regain full control of the GSEs while claiming to protect the taxpayer from greedy Wall Street hedge funds!
Choosing the nuclear option of receiving Fannie and Freddie, no matter how well orchestrated they are, will damage the conventional market. When a GSE receiving center is combined with a cut in MIPs at the FHA, the Ginnie Mae market should grow to $ 3 trillion or more over the next several years.
Shifting new production volumes to the FHA even though crime rates due to COVID are in their mid-teens is another deeply bad idea whose time seems to have come. In the event that President Biden takes the nuclear option with the GSEs, watch out for the Ginnie Mae market to grow to a third of all mortgage loans, down from less than 20% today. Washington only.